Too Much Protection?

Last year the state of Andhra Pradesh hobbled its microfinance institutions by mandating district level registration of MFIs – something that sounds innocent enough unless you have visited a district level office in India, in which case you would know that more a pro-business act would have been to shutter the MFIs altogether. The ordinance, as a final nail in the coffin, requires clients to make MFI loan payments at the Panchayat (local government) office. Again, one trip to a panchayat office, its long cues, its love of stamps and paperwork, its indifferent staff, and its inscrutable hours of operation, would convince you that a moneylender, no matter how costly, seems an appealing option.

According to the article, it would appear that clients miss their MFIs. One wonders why they stopped repaying their loans in the first place. Among the reasons cited in the study were an absence of new loans (“so why should I repay the old one?”), media reports that MFIs caused borrower suicides (“but on second thought no one in my village committed suicide so why am I paying attention to these reports?”), no one else is repaying (“so I’ll take a cue from my neighbor”), the government and opinion leaders pressured us not to repay (“so I will listen to them”).

So how are former MFI borrowers coping in the absence of MFIs? They are borrowing from other sources, reducing the scale of their businesses, postponing expenditures, and selling off assets.

They are also turning more to their savings groups, and the loans the self-groups in India can attract. Curiously, this article does not probe the use of the internal funds of groups in the aftermath of the MFI crisis. It only explores the use of government and bank loans to the Self Help Groups. The internal funds of SHGs look very much like VSLAs and other kinds of ASCA-type savings clubs. That the paper took great care in investigating the many sources of financing now available to rural households, but did not investigate the use of internal funds is puzzling. It would have been interesting to know if former MFI clients turned to group internal loans to help meet consumption needs.

But, the paper does a thorough job of examining external credit. Household opinion shows MFIs are the hands-down winners for doorstep convenience (and time is money); and quick loan processing. Surprisingly, respondents did not complain about harsh MFI collection practices, preferring to call them stringent instead of cruel and unscrupulous, words used by the government and media.

The meltdown in AP shows that a witch’s brew of indebtedness, saturation of credit options, and aggressive business practices can be a better brew than one with moneylenders as the major ingredient. In reading the report, I could not help but feel a tinge of regret of former MFI clients.

For all of us who admire savings groups, I think there is a lesson here as well. People like to borrow and having savings options is not going to change their interest in borrowing. What groups can change is how their members make choices. Better that such advice and change happens by group action than government fiat.